-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BGVaqm9sxFwfuThPs7QJkyP116E3xZXgiPsVW0tfbz2otAx6DiyAX6knOisnNqfM uowWDastyJYw4Hth9nr0/Q== 0000914317-04-002073.txt : 20040517 0000914317-04-002073.hdr.sgml : 20040517 20040517100602 ACCESSION NUMBER: 0000914317-04-002073 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROVIDENT BANCORP INC/NY/ CENTRAL INDEX KEY: 0001070154 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 800091851 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25233 FILM NUMBER: 04810121 BUSINESS ADDRESS: STREET 1: 400 RELLA BLVD CITY: MONTEBELLO STATE: NY ZIP: 10901 BUSINESS PHONE: 8453698040 10-Q 1 form10q-60465_provident.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2004 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number: 0-25233 PROVIDENT BANCORP, INC. (Exact Name of Registrant as Specified in its Charter) Delaware 80-0091851 (State or Other Jurisdiction of (IRS Employer ID No.) Incorporation or Organization) 400 Rella Boulevard, Montebello, New York 10901 (Address of Principal Executive Office) (Zip Code) (845) 369-8040 (Registrant's Telephone Number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_| Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Classes of Common Stock Shares Outstanding ----------------------- ------------------ $0.01 per share 39,619,261 as of May 11, 2004 1 PROVIDENT BANCORP, INC. QUARTERLY PERIOD ENDED MARCH 31, 2004 PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Statements of Financial Condition at March 31, 2004 and September 30, 2003 3-4 Consolidated Statements of Income for the Three Months and Six Months Ended March 31, 2004 and 2003 5 Consolidated Statement of Changes in Stockholders' Equity for the Six Months Ended March 31, 2004 and 2003 6-7 Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2004 and 2003 8-9 Consolidated Statements of Comprehensive Income for the Three Months and Six Months Ended March 31, 2004 and 2003 10 Notes to Consolidated Financial Statements 11-27 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 21-37 Item 3. Quantitative and Qualitative Disclosures about Market Risk 37 Item 4. Controls and Procedures 38 PART II. OTHER INFORMATION Item 1. Legal Proceedings 39 Item 2. Changes in Securities and Use of Proceeds 39 Item 3. Defaults upon Senior Securities 39 Item 4. Submission of Matters to a Vote of Security Holders 39 Item 5. Other Information 39 Item 6. Exhibits and Reports on Form 8-K 40 Signature 41 Certifications Pursuant to Sarbanes-Oxley Act of 2002 42-46 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements PROVIDENT BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited) (Dollars in thousands, except per share data)
Assets March 31, 2004 September 30, 2003 -------------- ------------------ Cash and due from banks $ 50,523 $ 33,500 Securities (Note 7): Available for sale, at fair value (amortized cost of $516,767 at March 31, 2004 and $294,801 at September 30, 2003) 524,173 300,715 Held to maturity, at amortized cost (fair value of $ 71,544 at March 31, 2004 and $75,628 at September 30, 2003) 69,735 73,544 ----------- ----------- Total securities 593,908 374,259 ----------- ----------- Loans held for sale 946 2,364 Gross loans (Note 5) 961,717 714,253 Allowance for loan losses (Note 6) (17,093) (11,069) ----------- ----------- Total loans, net 944,624 703,184 ----------- ----------- FHLB stock, at cost 6,724 8,220 Accrued interest receivable, net 6,570 4,851 Premises and equipment, net 16,365 11,647 Goodwill (Notes 2 and 3) 65,670 13,540 Core Deposit Intangible 6,900 1,063 Bank owned life insurance 12,985 12,483 Other assets 8,725 9,194 ----------- ----------- Total assets $ 1,713,940 $ 1,174,305 =========== ===========
(Continued) 3 PROVIDENT BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION, cONTINUED (Unaudited) (Dollars in thousands, except per share data)
Liabilities and Stockholders' Equity March 31, 2004 September 30, 2003 -------------- ------------------ Liabilities: Deposits (Note 8): Non-interest bearing $ 259,595 $ 163,009 Interest bearing 948,779 706,544 ----------- ----------- Total deposits 1,208,374 869,553 Borrowings 134,726 164,757 Mortgage escrow funds 6,993 3,949 Other 15,761 18,189 ----------- ----------- Total liabilities 1,365,854 1,056,448 ----------- ----------- Stockholders' equity: Preferred stock (par value $0.01 per share; 10,000,000 shares authorized; none issued or outstanding at March 31, 2004 and par value $0.10 per share; 10,000,000 shares authorized; none issued or outstanding at September 30, 2003) -- -- Common stock (par value $0.01 per share; 75,000,000 shares authorized; 39,619,261 shares issued and outstanding at March 31, 2004; par value $0.10 per share; 20,000,000 shares authorized; 8,280,000 shares issued; 7,946,521 shares outstanding at September 30, 2003) 396 828 Additional paid-in capital 268,209 38,032 Unallocated common stock held by the employee stock ownership plan ("ESOP") (1,503,150 shares at March 31, 2004 and 273,789 shares at September 30, 2003, respectively) (11,292) (1,597) Common stock awards under recognition and retention plan ("RRP") (253) (506) Treasury stock, at cost (0 shares at March 31, 2004 and 333,479 shares at September 30, 2003, respectively) -- (7,780) Retained earnings 86,644 85,398 Accumulated other comprehensive income 4,382 3,482 ----------- ----------- Total stockholders' equity 348,086 117,857 ----------- ----------- Total liabilities and stockholders' equity $ 1,713,940 $ 1,174,305 =========== ===========
See accompanying notes to unaudited consolidated financial statements. 4 PROVIDENT BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except share data)
For the Three Months For the Six Months Ended March 31, Ended March 31, --------------- --------------- 2004 2003 2004 2003 ---- ---- ---- ---- Interest and dividend income: Loans $ 13,821 $ 11,129 $ 24,351 $ 22,475 Securities 5,253 3,296 9,018 6,968 Other earning assets 11 14 34 20 ------------ ------------ ------------ ------------ Total interest and dividend income 19,085 14,439 33,403 29,463 ------------ ------------ ------------ ------------ Interest expense: Deposits 1,996 1,965 3,553 4,310 Borrowings 1,151 982 2,361 2,026 ------------ ------------ ------------ ------------ Total interest expense 3,147 2,947 5,914 6,336 ------------ ------------ ------------ ------------ Net interest income 15,938 11,492 27,489 23,127 Provision for loan losses (Note 6) 200 300 350 600 ------------ ------------ ------------ ------------ Net interest income after provision for loan losses 15,738 11,192 27,139 22,527 ------------ ------------ ------------ ------------ Non-interest income: Banking fees and service charges 1,806 1,114 3,190 2,203 Gain on sales of securities available for sale 518 427 1,448 1,084 Gains on sales of loans 84 403 170 442 Other 376 423 779 641 ------------ ------------ ------------ ------------ Total non-interest income 2,784 2,367 5,587 4,370 ------------ ------------ ------------ ------------ Non-interest expense: Compensation and employee benefits 6,699 5,016 11,650 9,232 Occupancy and office operations 1,663 1,358 2,990 2,490 Advertising and promotion 567 495 1,035 911 Professional fees 406 377 792 725 Data and check processing 765 683 1,509 1,378 Merger integration costs 717 -- 717 -- Amortization of core deposit intangible 703 115 787 242 Establishment of Charitable Foundation 5,000 -- 5,000 -- Other 2,130 1,513 3,740 3,052 ------------ ------------ ------------ ------------ Total non-interest expense 18,650 9,557 28,220 18,030 ------------ ------------ ------------ ------------ Income (loss) before income tax expense (128) 4,002 4,506 8,867 Income tax (benefit) expense (200) 1,482 1,389 3,306 ------------ ------------ ------------ ------------ Net income $ 72 $ 2,520 $ 3,117 $ 5,561 ============ ============ ============ ============ Weighted average common shares:(1) Basic 37,269,062 34,207,019 35,777,054 34,186,015 Diluted 37,912,560 34,728,985 36,391,057 34,696,935 Per common share: (Note 9)(1) Basic $ 0.00 $ 0.07 $ 0.09 $ 0.16 Diluted 0.00 0.07 0.09 0.16 Dividends declared 0.04 0.03 0.07 0.06 Book value at period end $ 8.79 $ 3.21
See accompanying notes to unaudited consolidated financial statements. - ---------- (1) Common share information has been adjusted to reflect the stock split of 4.4323 in connection with the second step conversion in January 2004. 5 PROVIDENT BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED MARCH 31, 2004 (Unaudited) (In thousands, except share and per share data)
Common Number of Additional Stock Shares Common Paid-In Unallocated Awards Outstanding(1) Stock Capital ESOP Shares Under RRP -------------- ----- ------- ----------- --------- Balance at September 30, 2003 7,946,521 $828 $ 38,032 $ (1,597) $ (506) Net Income Other comprehensive income Total comprehensive income Recapitalization (Note 2) 7,700,331 (672) (6,913) Common stock offering 19,573,000 196 192,229 Formation of Charitable Foundation 400,000 4 3,996 Purchase of ENB Holding Co., Inc. 3,969,676 40 39,657 Establishment of ESOP Plan (9,987) Tax benefits: Contribution of 400,000 shares 115 MHC contribution carryforward 512 Stock option transactions 29,733 9 ESOP shares allocated or committed to be released for allocation 572 292 Vesting of RRP shares 253 Cash dividends paid ($0.07 per common share) ---------- ----- -------- -------- ------ Balance at March 31, 2004 39,619,261 $ 396 $268,209 $(11,292) $ (253) ========== ===== ======== ======== ====== Total Treasury Retained Accum Stockholders' Stock Earnings OCI Equity ----- -------- --- ------ Balance at September 30, 2003 $(7,780) $85,398 $3,482 $117,857 Net Income 3,117 3,117 Other comprehensive income 900 900 -------- Total comprehensive income 4,017 Recapitalization (Note 2) 7,680 95 Common stock offering 192,425 Formation of Charitable Foundation 4,000 Purchase of ENB Holding Co., Inc. 39,697 Establishment of ESOP Plan (9,987) Tax benefits: Contribution of 400,000 shares 115 MHC contribution carryforward 512 Stock option transactions 100 (34) 75 ESOP shares allocated or committed to be released for allocation 864 Vesting of RRP shares 253 Cash dividends paid ($0.07 per common share) (1,837) (1,837) ------- ------- ------ -------- Balance at March 31, 2004 $ 0 $86,644 $4,382 $348,086 ======= ======= ====== ========
- ---------- (1) Share information has been adjusted to reflect 4.4323 conversion ratio in connection with the Company's second step conversion in January 2004. See accompanying notes to unaudited consolidated financial statements. 6 PROVIDENT BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED MARCH 31, 2003 (Unaudited) (In thousands, except share and per share data)
Common Number of Additional Stock Shares Common Paid-In Unallocated Awards Outstanding(2) Stock Capital ESOP Shares Under RRP -------------- ----- ------- ----------- --------- Balance at September 30, 2002 35,447,372 $ 823 $36,696 $(1,974) $(1,108) Net Income Other comprehensive loss Total comprehensive income Purchase of treasury stock (166,211 shares) 166,211 Stock option transactions 53,586 ESOP shares allocated or committed to be released for allocation (68,505 shares) 283 189 Vesting of RRP shares 256 Cash dividends paid ($0.06 per common share) Balance at March 31, 2003 35,344,747 $ 828 $36,979 $(1,785) $ 852 ========== ======= ======= ======= ======= Accumulated Other Total Treasury Retained Comprehensive Stockholders' Stock Earnings Income Equity ----- -------- ------ ------ Balance at September 30, 2002 $(5,874) $76,727 $5,572 $110,876 Net Income 5,561 5,561 Other comprehensive loss (1,162) (1,162) -------- Total comprehensive income 4,399 Purchase of treasury stock (166,211 shares) (1,157) (1,157) Stock option transactions 177 (134) 43 ESOP shares allocated or committed to be released for allocation (68,505 shares) 472 Vesting of RRP shares 256 Cash dividends paid ($0.06 per common share) (1,335) (1,335) Balance at March 31, 2003 $ 6,854 $80,819 $4,410 $113,545 ======= ======= ====== ========
- ---------- (2) Share information has been adjusted to reflect 4.4323 conversion ratio in connection with the Company's second step conversion in January 2004. See accompanying notes to unaudited consolidated financial statements. 7 PROVIDENT BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
For the Six Months Ended March 31, 2004 2003 ---- ---- Cash flows from operating activities: Net income $ 3,117 $ 5,561 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 350 600 Depreciation and amortization of premises and equipment 1,065 961 Amortization of core deposit intangible 787 242 Gain on sales of securities available for sale (1,448) (1,084) Gain on sales of loans held for sale (170) (442) Gain on sales of fixed assets sold (46) -- Net amortization of premiums and discounts on securities 1,176 487 ESOP and RRP expense 1,117 728 Originations of loans held for sale (5,264) (13,501) Proceeds from sales of loans held for sale 6,852 13,775 Deferred income tax expense (benefit) 5 570 Net changes in accrued interest receivable and payable 293 204 Other adjustments (principally net changes in other assets and other liabilities) (3,863) (632) --------- --------- Net cash provided by operating activities 3,971 7,469 --------- --------- Cash flows from investing activities: Purchases of securities: Available for sale (331,617) (81,392) Held to maturity (4,070) (24,809) Proceeds from maturities, calls and other principal payments on securities: Available for sale 44,942 35,279 Held to maturity 10,908 18,188 Proceeds from sales of securities available for sale 90,892 16,113 Loan originations (151,285) (188,865) Loan principal payments 123,303 169,556 Sale (purchase) of FHLB stock 1,496 (622) Purchase of ENB Holding Co. 60,297 -- Purchase of bank owned life insurance -- (12,000) Purchases of premises and equipment (1,784) (1,234) Other Adjustments 22 218 --------- --------- Net cash used in investing activities (156,896) (69,568) --------- ---------
(continued) 8 PROVIDENT BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (Unaudited) (In thousands)
For the Six Months Ended March 31, --------------- 2004 2003 ---- ---- Cash flows from financing activities: Net increase in transaction and savings deposits $ 8,857 $ 41,992 Net increase (decrease) in time deposits 2,680 (994) Receipt of stock subscription funds 192,425 -- Net (decrease)/increase in borrowings (30,031) 16,420 Net increase in mortgage escrow funds 3,044 3,898 Establishment of ESOP plan (9,987) -- Common stock issued for formation of charitable foundation 4,000 -- Tax benefit: contribution of 400,000 shares to charitable foundation 115 -- Tax benefit: MHC contribution carry-forward 512 -- Recapitalization 95 -- Treasury shares purchased -- (1,157) Exercises of stock options 75 43 Cash dividends paid (1,837) (1,335) --------- --------- Net cash provided by financing activities 169,948 58,867 --------- --------- Net increase (decrease) in cash and cash equivalents 17,023 (3,232) Cash and cash equivalents at beginning of period 33,500 35,093 --------- --------- Cash and cash equivalents at end of period $ 50,523 $ 31,861 ========= ========= Supplemental information: Interest payments 5,620 $ 6,455 Income tax payments 1,235 3,231 Fair value of assets acquired (incl. intangibles) 406,267 -- Fair value of liabilities assumed 329,797 -- Net fair value 76,470 -- Cash portion of ENB Holding Co. purchase transaction 36,773 -- Stock portion of ENB Holding Co. purchase transaction 39,697 -- Total paid for ENB Holding Co. stock 76,470 Transfer of loans to real estate owned 112 99 Net change in unrealized gains recorded on securities available for sale 1,490 (1,959) Change in deferred taxes on unrealized gains on securities available for sale (596) 783
See accompanying notes to unaudited consolidated financial statements. 9 PROVIDENT BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Dollars in thousands)
Three Months Six Months Ended March 31, Ended March 31, --------------- --------------- 2004 2003 2004 2003 ---- ---- ---- ---- Net income: $ 72 $ 2,520 $ 3,117 $ 5,561 Other comprehensive income (loss): Net unrealized gains (losses) on securities available for sale: Net unrealized holding gains (losses) arising during the year, net of taxes of $1,749, $197, $1,179 and $349 2,623 (292) 1,769 (522) Less reclassification adjustment for net realized gains included in net income, net of taxes of $207, $171, $579 and $434 (311) (256) (869) (650) Net unrealized gain on derivatives, net of taxes of $0, $(2), $0 and $(6) -- 4 -- 10 ------- ------- ------- ------- Other comprehensive income (loss) 2,312 (544) 900 (1,162) ------- ------- ------- ------- Total comprehensive income $ 2,384 $ 1,976 $ 4,017 $ 4,399 ======= ======= ======= =======
See accompanying notes to unaudited consolidated financial statements. 10 PROVIDENT BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars in thousands, except per share amounts) 1. Basis of Presentation The consolidated financial statements and other financial information presented in this document as of March 31, 2004, include the accounts of Provident Bancorp, Inc., a Delaware corporation (the "Company"), Provident Bank (the "Bank"), and each subsidiary of Provident Bank (Shawangunk Holding Co., Inc., Provest Services Corp., Provest Services Corp. I, Provest Services Corp. II, Provident REIT, Inc. and Provident Municipal Bank). Collectively, these entities are referred to herein as the "Company." Provident Bancorp, Inc. is a publicly-held company and the parent of Provident Bank. Provest Services Corp. I holds an investment in a low-income housing partnership which provides certain favorable tax consequences. Provest Services Corp. II has engaged a third-party provider to sell annuities to the customers of Provident Bank. Through March 31, 2004, the activities of these two wholly-owned subsidiaries have had a minor impact on the Company's consolidated financial condition and results of operations. Provident REIT, Inc. holds a portion of the Company's real estate loans and is a real estate investment trust for federal income tax purposes. Provident Municipal Bank ("PMB") is a limited purpose New York State-chartered commercial bank, which began operations on April 19, 2002 and is authorized to accept deposits from municipalities in the Bank's business area. The Company's off-balance sheet activities are limited to loan origination commitments, lines of credit and letters of credit extended to customers in the ordinary course of its lending activities. The Company does not engage in off-balance sheet financing transactions or other activities involving the use of special-purpose entities. The consolidated financial statements have been prepared by management without audit, but, in the opinion of management, include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the Company's financial position and results of operations as of the dates and for the periods presented. Although certain information and footnote disclosures have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission applicable to quarterly reports on Form 10-Q, the Company believes that the disclosures are adequate to make the information presented not misleading. The results of operations for the six months ended March 31, 2004 are not necessarily indicative of results to be expected for other interim periods or the entire fiscal year ending September 30, 2004. The unaudited consolidated financial statements presented herein should be read in conjunction with the annual audited financial statements included in the Company's Form 10-K for the fiscal year ended September 30, 2003. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expense. Actual results could differ significantly from these estimates. A material estimate that is particularly susceptible to near-term change is the allowance for loan losses (see Note 6), which is a critical accounting policy. 11 Certain prior-year amounts have been reclassified to conform to the current-year presentation. Stock-Based Compensation The Company applies APB Opinion 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for its stock option plan. No stock-based employee compensation cost is reflected in net income, as all options granted under this plan had an exercise price equal to the market value of the underlying common stock on the date of the grant. SFAS No. 123, Accounting for Stock-Based Compensation, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123. The following table illustrates the effect on net income if the fair-value-based method had been applied to all outstanding awards in each period. In April 2003 the FASB decided to require all companies to expense the value of employee stock options commencing in 2005, but has not decided how to measure the fair value of the options. As such, the financial statement impact of stock option expensing is not known at this time. 12
Three Months Ended Six Months Ended March 31, March 31, 2004 2003 2004 2003 ---- ---- ---- ---- Net income, as reported $ 72 $ 2,520 $ 3,117 $ 5,561 Add RRP expense included in reported net income, net of related tax effects 79 86 163 173 Deduct RRP and stock option expense determined under the fair-value-based method, net of related tax effects (150) (163) (234) (326) --------- --------- --------- --------- Pro forma net income $ 1 $ 2,443 $ 3,046 $ 5,408 ========= ========= ========= ========= Earnings per share: Basic, as reported $ 0.00 $ 0.07 $ 0.09 $ 0.16 Basic, pro forma 0.00 0.07 0.09 0.16 Diluted, as reported 0.00 0.07 0.09 0.16 Diluted, pro forma 0.00 0.07 0.08 0.16
2. Mutual Holding Company Conversion and Acquisition of E.N.B. Holding Company, Inc. On January 14, 2004 the Company completed its stock offering in connection with the second-step conversion of Provident Bancorp, MHC. As a result of the conversion, the Company became the stock holding company of the Bank. In the stock offering, shares representing Provident Bancorp, MHC's ownership interest in Provident Bancorp., Inc., a federal Corporation ("Provident Federal") were sold to investors. In addition, the Company simultaneously completed its acquisition of E.N.B. Holding Company, Inc., ("ENB") located in Ellenville, New York. The Company sold 19,573,000 shares of common stock at $10.00 per share to depositors of the Bank as of June 30, 2002 and September 30, 2003. The new holding company also issued 400,000 shares of common stock and contributed $1.0 million in cash to the Provident Bank Charitable Foundation. In addition, each outstanding share of common stock of Provident Federal as of January 14, 2004 has been converted into 4.4323 new shares of the Company's common stock. Shareholders of ENB as of the close of business on January 14, 2004 received total merger consideration of approximately $76.47 million, consisting of 3,969,676 shares of common stock of the Company and approximately $36.77 million in cash. As a result of the above transactions, the Company had 39,608,586 issued and outstanding shares at January 14, 2004. Financial statements as of March 31, 2004, reflect the effect of the conversion of existing common shares, the stock offering and the acquisition of ENB. Goodwill recorded in the ENB acquisition ($52.1 million) is not amortized to expense, but instead is reviewed for impairment at least annually, with impairment losses charged to expense, if and when they occur. The core deposit intangible 13 asset ($6.0 million at March 31, 2004), is recognized apart from goodwill and amortized to expense over its estimated useful life and evaluated for impairment. 3. Acquisition of The National Bank of Florida On April 23, 2002, the Company consummated its acquisition, for cash, of The National Bank of Florida ("NBF"), which was merged with and into the Bank. The transaction was valued at approximately $28.1 million. At the acquisition date, NBF had total assets of approximately $104 million and total deposits of approximately $88.2 million. Amounts attributable to NBF are included in the Company's consolidated financial statements from the date of acquisition. Goodwill recorded in the NBF acquisition ($13.5 million) is not amortized to expense, but instead is reviewed for impairment at least annually, with impairment losses charged to expense, if and when they occur. The core deposit intangible asset, ($901,000 and $1.1 million at March 31, 2004 and September 30, 2003, respectively), is recognized apart from goodwill and amortized to expense over its estimated useful life and evaluated for impairment. 4. Critical Accounting Policies The accounting and reporting policies of the Company are prepared in accordance with accounting principles generally accepted within the United States of America and conform to general practices within the banking industry. Accounting policies considered critical to the Company's financial results include the allowance for loan losses, accounting for goodwill and the recognition of interest income. The methodology for determining the allowance for loan losses is considered by management to be a critical accounting policy due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the allowance for loan losses considered necessary. Accounting for goodwill is considered to be a critical policy because goodwill must be tested for impairment at least annually using a "two-step" approach that involves the identification of reporting units and the estimation of fair values. The estimation of fair values involves a high degree of judgment and subjectivity in the assumptions utilized. Interest income on loans, securities and other interest-earning assets is accrued monthly unless management considers the collection of interest to be doubtful. Loans are placed on nonaccrual status when payments are contractually past due 90 days or more, or when management has determined that the borrower is unlikely to meet contractual principal or interest obligations. At such time, unpaid interest is reversed by charging interest income. Interest payments received on nonaccrual loans (including impaired loans) are recognized as income unless future collections are doubtful. Loans are returned to accrual status when collectibility is no longer considered doubtful (generally, when all payments have been brought current). Application of assumptions different than those used by management could result in material changes in the Company's financial position or results of operations. Footnote 3 (Summary of Significant Accounting Policies) of the 2003 Annual Report on Form 10-K provides detail with regard to the Company's accounting for the allowance for loan losses. There have been no significant changes in the application of accounting policies since September 30, 2003. 14 5. Loans Major classifications of loans, excluding loans held for sale, are summarized below:
March 31, 2004 September 30, 2003 -------------- ------------------ Real estate - residential mortgage $389,154 $380,776 Real estate - commercial mortgage 311,284 188,360 Real estate - construction 41,686 10,323 Commercial and industrial 101,014 54,174 Consumer loans 118,579 80,620 -------- -------- Total $961,717 $714,253 ======== ========
6. Allowance for Loan Losses and Non-Performing Assets The allowance for loan losses is established through provisions for losses charged to earnings. Loan losses are charged against the allowance when management believes that the collection of principal is unlikely. Recoveries of loans previously charged-off are credited to the allowance when realized. The allowance for loan losses is the amount that management has determined to be necessary to absorb probable loan losses inherent in the existing portfolio. Management's evaluations, which are subject to periodic review by the Company's regulators, are made using a consistently-applied methodology that takes into consideration such factors as the Company's past loan loss experience, changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and collateral values, and current economic conditions that may affect the borrowers' ability to pay. Changes in the allowance for loan losses may be necessary in the future based on changes in economic and real estate market conditions, new information obtained regarding known problem loans, regulatory examinations, the identification of additional problem loans, and other factors. Activity in the allowance for loan losses for the periods indicated is summarized below:
Three Months Six Months Ended March 31, Ended March 31, --------------- --------------- 2004 2003 2004 2003 ---- ---- ---- ---- Balance at beginning of period $ 11,249 $ 10,687 $ 11,069 $ 10,383 Allowance acquired through acquisition 5,750 -- 5,750 -- Provision for loan losses 200 300 350 600 Charge-offs (136) (117) (148) (131) Recoveries 30 31 72 49 -------- -------- -------- -------- Balance at end of period $ 17,093 $ 10,901 $ 17,093 $ 10,901 ======== ======== ======== ========
15 The following table sets forth the amounts and categories of the Company's non-performing assets at the dates indicated. At both dates, the Company had no troubled debt restructurings (loans for which a portion of interest or principal has been forgiven and loans modified at interest rates materially less than current market rates).
March 31, 2004 September 30, 2003 -------------- ------------------ Non-accrual loans: One- to four-family residential mortgage loans $ 950 $ 951 Commercial real estate, commercial business and construction loans 3,004 3,632 Consumer loans 184 114 Total non-performing loans 4,138 4,697 Real estate owned: One- to four-family residential 112 -- ------ ------ Total non-performing assets $4,250 $4,697 ====== ====== Ratios: Non-performing loans to total loans, net 0.44% 0.66% Non-performing assets to total assets 0.25% 0.40% Allowance for loan losses to total non-performing loans 413.07% 235.66% Allowance for loan losses to total loans 1.78% 1.55%
16 7. Securities The following is a summary of securities available for sale ("AFS") at March 31, 2004 and September 30, 2003:
Available for Sale Portfolio March 31, 2004 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ======================================================= Mortgage-backed ("MBS") and SBA Securities Mortgage-backed securities $ 285,050 $ 4,491 $ (432) $ 289,109 Collateralized mortgage obligations 14,699 50 (27) 14,722 SBAs and other 184 1 -- 185 --------- --------- --------- --------- Total mortgage-backed and SBA securities 299,933 4,541 (459) 304,016 --------- --------- --------- --------- Investment Securities U.S. Government and federal agency securities 195,277 3,245 (62) 198,460 State and municipal securities 20,552 166 (164) 20,554 Equity securities 1,005 302 (164) 1,143 --------- --------- --------- --------- Total investment securities 216,834 3,713 (390) 220,157 --------- --------- --------- --------- Total available for sale $ 516,767 $ 8,254 $ (849) $ 524,173 ========= ========= ========= ========= Available for Sale Portfolio September 30, 2003 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ======================================================= Mortgage-backed and SBA Securities Mortgage-backed securities $ 135,049 $ 2,541 $ (648) $ 136,942 Collateralized mortgage obligations 19,733 -- (55) 19,678 SBAs and other 206 -- -- 206 --------- --------- --------- --------- Total mortgage-backed and SBA securities 154,988 2,541 (703) 156,826 --------- --------- --------- --------- Investment Securities U.S. Government and federal agency securities 130,186 3,278 (60) 133,404 State and municipal securities 2,545 26 (35) 2,536 Corporate debt securities 6,030 593 -- 6,623 Equity securities 1,052 359 (85) 1,326 --------- --------- --------- --------- Total investment securities 139,813 4,256 (180) 143,889 --------- --------- --------- --------- Total available for sale $ 294,801 $ 6,797 $ (883) $ 300,715 ========= ========= ========= =========
17 The following is a summary of securities held to maturity ("HTM") at March 31, 2004 and September 30, 2003:
Held to Maturity Portfolio March 31, 2004 ------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ======================================================= Mortgage-backed Securities Mortgage-backed securities $ 42,363 $ 1,148 $ (154) $ 43,357 Collateralized mortgage obligations 3,537 51 -- 3,588 --------- --------- --------- --------- Total mortgage-backed securities 45,900 1,199 (154) 46,945 --------- --------- --------- --------- Investment Securities State and municipal securities 23,476 1,071 (271) 24,276 Other investments 359 -- (36) 323 --------- --------- --------- --------- Total investment securities $ 23,835 $ 1,071 $ (307) $ 24,599 --------- --------- --------- --------- Total held to maturity $ 69,735 $ 2,270 $ (461) $ 71,544 ========= ========= ========= ========= Held to Maturity Portfolio September 30, 2003 ------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ======================================================= Mortgage-backed Securities Mortgage-backed securities $ 50,863 $ 1,271 $ (255) $ 51,879 Collateralized mortgage obligations 4,297 66 -- 4,363 --------- --------- --------- --------- Total mortgage-backed securities 55,160 1,337 (255) 56,242 --------- --------- --------- --------- Investment Securities State and municipal securities 18,384 1,003 (1) 19,386 --------- --------- --------- --------- Total held to maturity $ 73,544 $ 2,340 $ (256) $ 75,628 ========= ========= ========= =========
18 At March 31, 2004 and September 30, 2003, the unrealized net gain on securities available for sale (net of tax of $3,024 and $2,432, respectively) that was included in accumulated other comprehensive income, a separate component of stockholders' equity, was $4,382 and $3,482 respectively. Gross realized gains were $518 and $427 respectively, for the three months ended March 31, 2004 and 2003, and $1,448 and $1,084, respectively, for the six months ended March 31, 2004 and 2003. Securities with a carrying amount of $136,101 and $69,452 were pledged as collateral for municipal deposits, borrowings and other purposes at March 31, 2004 and September 30, 2003, respectively. 8. Deposits Major classifications of deposits are summarized below: March 31, 2004 September 30, 2003 -------------- ------------------ Demand deposits: Retail $ 123,009 $ 90,471 Commercial and municipal 136,586 72,538 NOW 80,710 62,367 ---------- ---------- Total transaction accounts 340,305 225,376 Money market 156,617 128,222 Savings 356,894 279,717 Time under $100,000 253,742 187,623 Time over $100,000 100,816 48,615 ---------- ---------- Total $1,208,374 $ 869,553 ========== ========== 9. Earnings Per Common Share The number of shares used in the computation of both basic and diluted earnings per share includes all shares issued to Provident Bancorp, MHC for all periods through January 14, 2004, but excludes unallocated ESOP shares that have not been released or committed to be released to participants. Unvested RRP shares are excluded from basic earnings per share calculations only. The common stock equivalent shares are incremental shares (computed using the treasury stock method) that would have been outstanding if all potentially dilutive stock options and unvested RRP shares were exercised or became vested during the periods. Prior period share information has been adjusted to reflect the 4.4323 exchange ratio in connection with the Company's stock offering completed January 14, 2004. 19 Basic earnings per common share is computed as follows (dollars in thousands, except share data):
For the Three Months For the Six Months Ended March 31, Ended March 31, 2004 2003 2004 2003 ---- ---- ---- ---- Weighted average common shares outstanding (basic) 37,269,062 34,207,019 35,777,054 34,186,015 ----------- ----------- ----------- ----------- Net income $ 72 $ 2,520 $ 3,117 $ 5,561 Basic earnings per common share $ 0.00 $ 0.07 $ 0.09 $ 0.16
Diluted earnings per common share is computed as follows (dollars in thousands, except share data):
For the Three Months For the Six Months Ended March 31, Ended March 31, --------------- --------------- 2004 2003 2004 2003 ---- ---- ---- ---- Weighted average common shares outstanding 37,269,062 34,207,019 35,777,054 34,186,015 Effect of common stock equivalents 643,498 521,966 614,003 510,920 ----------- ----------- ----------- ----------- Total diluted shares 37,912,560 34,728,985 36,391,057 34,696,935 Net income $ 72 $ 2,520 $ 3,117 $ 5,561 Diluted earnings per common share $ 0.00 $ 0.07 $ 0.09 $ 0.16
10. Guarantor's Obligations Under Guarantees Standby letters of credit are commitments issued by the Company on behalf of its customer/obligor in favor of a beneficiary that specify an amount the Company can be called upon to pay upon the beneficiary's compliance with the terms of the letter of credit. These commitments are primarily issued in favor of local municipalities to support the obligor's completion of real estate development projects. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. As of March 31, 2004, the Company had $12.0 million in outstanding letters of credit, of which $5.5 million were secured by cash collateral. 20 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements The Company has made, and may continue to make, various forward-looking statements with respect to earnings, credit quality and other financial and business matters for 2004 and, in certain instances, subsequent periods. The Company cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, and that statements for subsequent periods are subject to greater uncertainty because of the increased likelihood of changes in underlying factors and assumptions. Actual results could differ materially from forward-looking statements. In addition to those factors previously disclosed by the Company and those factors identified elsewhere herein, the following factors could cause actual results to differ materially from such forward-looking statements; pricing pressures on loan and deposit products; changes in local and national economic conditions; the extent and timing of actions of the Company's regulators; customer deposit disintermediation; changes in customers' acceptance of the Company's products and services; general actions of competitors, other normal business risks such as credit losses, litigation, increases in the levels of non-performing assets, revenues following acquisitions if such revenues are lower than expected, and costs or difficulties related to the integration of acquired and existing businesses that are greater than expected. The Company's forward-looking statements speak only as of the date on which such statements are made. The Company assumes no duty to update forward-looking statements to reflect new, changing or unanticipated events or circumstances. The Company's significant accounting policies are summarized in Note 3 to the consolidated financial statements included in its September 30, 2003 Annual Report on Form 10-K. An accounting policy considered particularly critical to the Company's financial results is the allowance for loan losses. The methodology for assessing the appropriateness of the allowance for loan losses and non-performing loans is considered a critical accounting policy by management due to the high degree of judgment involved, the subjectivity of the assumptions utilized, and the potential for changes in the economic environment that could result in changes in the necessary allowance. As discussed in Note 3 to the consolidated financial statements included in Item 1 of this quarterly report, the Company completed its acquisition of NBF in April 2002. The acquisition was accounted for as a purchase and, accordingly, amounts attributable to NBF have been included in the Company's consolidated financial statements from the date of acquisition. In April 2002, the Company announced the formation of PMB, a commercial bank subsidiary of the Bank, to serve the banking needs of municipalities throughout our service area, primarily Rockland and Orange Counties. The Bank is a federally chartered savings association and municipalities in New York State may only deposit funds in commercial banks. The formation of PMB provides a vehicle for the deposit of funds that may not be deposited with the Bank. 21 As of January 14, 2004, the Company completed its stock offering and acquisition of ENB in connection with Provident Bancorp, MHC's mutual-to-stock conversion. The acquisition was accounted for as a purchase and, accordingly, amounts attributable to ENB have been included in the Company's consolidated financial statements from the date of acquisition. See Note 2 to the accompanying consolidated financial statements included in Item 1 of this quarterly report. Comparison of Financial Condition at March 31, 2004 and September 30, 2003 Total assets as of March 31, 2004 were $1.7 billion, an increase of $540 million, or 46.0% over assets of $1.2 billion at September 30, 2003, and an increase of $623 million, or $57.1%, over assets of $1.1 billion at March 31, 2003. The increases were due primarily to the January 2004 acquisition of ENB, whose assets totaled $349.7 million on the merger date, and proceeds from the offering in the second-step conversion of $192.4 million, net of related costs. Net loans as of March 31, 2004 were $944.6 million, an increase of $241.4 million, or 34.3%, over net loan balances of $703.2 million at September 30, 2003, and an increase of $265.1 million, or 39.0%, over balances at March 31, 2003. Loans acquired from ENB totaled $219.2 million, while the allowance for loan losses acquired in connection with ENB was $5.7 million, or 2.6% of outstanding loan balances, net. Post-acquisition, residential loans increased by $8.4 million, or 2.2% over balances at September 30, 2003. Commercial loans increased by $201.1 million, or 79.5%, during the six month period, while consumer loans increased by $38.0 million, or 47.1%, both primarily attributable to the ENB acquisition. Asset quality continues to be strong. At March 31, 2004, non-performing assets were $4.3 million, or 0.25% of total assets, compared to $4.7 million at September 30, 2003 and $5.8 million at March 31, 2003. Total securities increased by $219.6 million, or 58.7%, to $593.9 million at March 31, 2004 as the Company invested the majority of the stock subscription funds received in securities. Investments were made primarily in mortgage-backed securities, which increased by $152.2 million, or 111.1%, and in U.S. Government and Federal Agency Securities, which increased by $65.1 million, or 48.8%. Total deposits as of March 31, 2004 were $1.2 billion, up $338.8 million, or 39.0%, from September 30, 2003, and $367.8 million, or 43.8%, from March 31, 2003. Deposits acquired from ENB totaled $326.8 million. The remaining increase from September 30, 2003 to March 31, 2004 was $12.0 million, after ENB deposits acquired. However, charges to deposit accounts for the purchase of shares of common stock in the second step offering totaled $21.1 million, thereby resulting in a true increase in deposits of $33.1 million, or 3.8%. As of March 31, 2004 retail and commercial transaction accounts were 28.2% of deposits compared to 25.9% at September 30, 2003 and 24.7% at March 31, 2003. Borrowings from the Federal Home Loan Bank of New York (the "FHLB") decreased by $30.1 million during the six-month period to $134.7 million at March 31, 2004 from $164.8 million at September 30, 2003, as the Company used uninvested stock subscription funds to pay down overnight borrowings. 22 Stockholders' equity increased by $230.2 million to $348.1 million at March 31, 2004 compared to $117.9 million at September 30, 2003. The Company completed its second-step stock conversion in January 2004, raising $192.4 million in new capital, net of related costs. In addition, $39.7 million and $4.0 million, respectively, in new shares of common stock was issued for the purchase of ENB and for the formation of the charitable foundation. Net income of $3.1 million for the six-month period also increased capital. Partially offsetting the increases were the payments of cash dividends totaling $1.8 million and the establishment of a new ESOP plan for $10.0 million. During the first six months of fiscal 2004, the Company did not repurchase shares of its common stock. The total shares repurchased under its previously announced repurchase programs, which authorized the repurchase of up to 553,990 shares, including the March 2003 authorization of 177,250 shares, was 399,555 shares through March 31, 2004. At March 31, 2004, there were no shares of common stock held by the Company in treasury. The authorization to repurchase shares of the Company's common stock expired in connection with its second-step conversion on January 14, 2004, pursuant to applicable Office of Thrift Supervision regulations that restrict stock repurchases for one year following the completion of a mutual stock conversion. Supplemental Reporting of Non-GAAP Results of Operations. The Company is providing supplemental reporting of its results on a "net operating cash" or "tangible" basis, from which the Company excludes the after tax charge for establishing the charitable foundation, the after-tax effect of amortization of core deposit intangible assets and expenses associated with merging acquired operations into the Company. Although "net operating cash income" as defined by the Company is not a GAAP measure, management believes that this information helps investors understand the effect of acquisition activity and the establishment of the charitable foundation in reported results. The after-tax effect of the establishment of the charitable foundation was $3,000 ($0.08 per share). Merger integration expenses were $430,000 after tax for both the three and six months ended March 31, 2004. The after-tax effect of the amortization of core deposit intangible assets was $422,000 ($0.01 per diluted share) in the recent quarter, compared with $69,000 (less than $0.01 per diluted share) in the year-earlier quarter. Similar amortization charges for the six months ended March 31, 2004 and 2003 were $472,000, after tax ($0.01 per diluted share) and $145,000 after tax (less than $0.01 per diluted share), respectively. Diluted net operating cash earnings per share, which exclude the impact of the establishment of the charitable foundation, amortization of core deposit intangible assets and merger-related expenses, were $0.10 for the quarter ended March 31, 2004, compared with $0.07 in the second quarter of 2003. Net operating income for the recent quarter was $3.9 million, an increase of 51.6% from $2.6 million in the year-earlier quarter. Expressed as an annualized rate of return on average assets and average stockholders' equity, net operating income was 1.04% and 5.1% respectively, in the quarter ended March 31, 2004, compared with 0.98% and 9.09% in the quarter ended March 31, 2003. 23 Reconciliation of GAAP and Non-GAAP results of operations: A reconciliation of diluted earnings per share and net income with diluted net operating cash earnings per share and net operating income follows (in thousands, except per share amounts):
Three months ended March 31, Six months ended March 31, ---------------------------- -------------------------- 2004 2003 2004 2003 ---- ---- ---- ---- Diluted cash earnings per share $ 0.00 $ 0.07 $ 0.09 $ 0.16 Charge for establishment of charitable foundation (1) 0.08 0.08 Merger integration expenses (1) 0.01 0.01 Amortization of core deposit intangibles (1) 0.01 0.01 ------ ------ Diluted net cash operating earnings $ 0.10 $ 0.07 $ 0.19 $ 0.16 ====== ====== ====== ====== Net Income $ 72 $2,520 $3,117 $5,561 Charge for establishment of charitable foundation (1) 3,000 3,000 Merger integration expenses (1) 430 430 Amortization of core deposit intangibles (1) 422 69 472 145 ------ ------ ------ ------ Net operating cash income $3,924 $2,589 $7,019 $5,706 ====== ====== ====== ======
(1) After related tax effect at 40% marginal rate Comparison of Operating Results for the Three Months Ended March 31, 2004 and March 31, 2003 Net Income. For the three months ended March 31, 2004 net interest income after provision for loan losses was $15.7 million, an increase of $4.5 million, or 40.6%, compared to $11.2 million for the same period in fiscal 2003. Non-interest income was $2.8 million for the three months ended March 31, 2004 compared to $2.4 million for the same period last year, an increase of $417,000, or 17.6%, including an increase in gains on sale of securities of $91,000. Non-interest expenses increased $9.1 million (including $5.0 million for the establishment of the charitable foundation), or 95.1%, to $18.7 million for the three months ended March 31, 2004 compared to $9.6 million for the same prior-year period. Net income after taxes was $72,000 for the three months ended March 31, 2004 and $2.4 million for the same period of 2003. The relevant performance measures follow: Three Months Ended March 31, 2004 2003 ---- ---- Per common share: Basic earnings $0.00 $0.07 Diluted earnings 0.00 0.07 Dividends declared 0.04 0.03 Return on average (annualized): Assets 0.02% 0.97% Equity 0.10% 9.09% 24 The following table sets forth the consolidated average balance sheets for the Company for the periods indicated. Also set forth is information regarding weighted average yields on interest-earning assets and weighted average rates paid on interest-bearing liabilities (dollars in thousands).
Three Months Ended March 31, ---------------------------- 2004 2003 ---- ---- Average Average Outstanding Average Outstanding Average Balance Interest Yield/Rate Balance Interest Yield/Rate ------- -------- ---------- ------- -------- ---------- Interest earning assets: Commercial and commercial mortgage loans (1) $ 355,297 $ 6,000 6.79% $ 216,172 $ 3,788 7.11% Consumer loans (1) 116,433 1,457 5.03 80,896 1,038 5.20 Residential mortgage loans (1) 421,165 6,364 6.08 386,727 6,303 6.61 ---------- ------- ---------- ------- Total loans 892,895 13,821 6.23 683,795 11,129 6.60 ---------- ------- ---------- ------- AFS investments and MBS 493,113 4,337 3.54 208,780 2,127 4.13 HTM investments and MBS 72,619 885 4.90 77,094 1,169 6.15 Other earning assets 10,949 42 1.57 3,932 14 1.44 ---------- ------- ---------- ------- Total securities and other earning assets 576,681 5,264 3.67 289,806 3,310 4.63 ---------- ------- ---------- ------- Total interest-earning assets 1,469,576 19,085 5.22 973,601 14,439 6.01 Non-interest-earning assets: 178,462 82,153 ---------- ---------- Total assets $1,648,038 $1,055,754 ========== ========== Interest bearing liabilities: Savings, clubs and escrow $ 384,097 $ 425 0.45% $ 266,936 $ 369 0.56% Money market accounts 143,320 200 0.56 116,217 243 0.85 NOW checking 76,496 50 0.26 86,381 55 0.26 Certificate accounts 321,675 1,322 1.65 242,324 1,298 2.17 ---------- ------- ---------- ------- Total interest-bearing deposits 925,588 1,997 0.87 711,858 1,965 1.12 Borrowings 159,020 1,150 2.91 105,039 982 3.79 ---------- ------- ---------- ------- Total interest-bearing liabilities 1,084,608 3,147 1.17 816,897 2,947 1.46 ------- ------- ------- ---- Non-interest-bearing liabilities: 252,572 126,451 ---------- ---------- Total liabilities 1,337,180 943,348 Equity 310,858 112,406 ---------- ---------- Total liabilities and equity $1,648,038 $1,055,754 ========== ========== Net interest income $15,938 $11,492 ======= ======= Net interest rate spread 4.06% 4.55% ==== ==== Net earning assets $ 384,968 $ 156,704 ========== ========== Net interest margin 4.36% 4.79% ==== ==== Ratio of average interest-earning assets to average interest-bearing liabilities 135.49% 119.18% ======= =======
(1) Includes non-accrual loans. 25 The table below details the changes in interest income and interest expense for the periods indicated due to both changes in average outstanding balances and changes in average interest rates (in thousands): Three Months Ended March 31, 2004 vs. 2003 Increase/(Decrease) Due to -------------------------- Volume (1) Rate (1) Total ---------- -------- ----- Interest-earning assets Consumer loans $ 2,391 $ (179) $ 2,212 Commercial and commercial mortgage loans 454 (35) 419 Residential mortgage loans 571 (510) 61 Available for sale securities 2,557 (347) 2,210 Held to maturity securities (63) (221) (284) Other earning assets 27 1 28 ------- ------- ------- Total interest income 5,937 (1,291) 4,646 ------- ------- ------- Interest-bearing liabilities Savings 140 (84) 56 Money market 51 (94) (43) NOW checking (5) 0 (5) Certificates of deposit 377 (353) 24 Borrowings 434 (266) 168 ------- ------- ------- Total interest expense 997 (797) 200 ------- ------- ------- Net interest income $ 4,940 $ (494) $ 4,446 ======= ======= ======= - -------------------------------------------------------------------------------- (1) Changes due to increases in both rate and volume have been allocated proportionately to rate and volume. 26 Net Interest Income. Net interest income after provision for loan losses for the three months ended March 31, 2004 was $15.7 million, compared to $11.2 million for the three months ended March 31, 2003, an increase of $4.5 million, or 41%. The increase in net interest income was largely due to a $496.0 million increase in average earning assets to $1.5 billion during the quarter ended March 31, 2004, as compared to $973.6 million for the same quarter in the prior year, due primarily to the ENB acquisition and net proceeds from the second-step offering. The increase in average earning assets was partially offset by a decline in average yield of 79 basis points from 6.01% to 5.22%. A decrease in the average cost of interest bearing liabilities of 29 basis points still resulted in a $201,000 increase in interest expense for the quarter compared to the same quarter in 2003, as average interest-bearing liabilities increased by $268 million. Net interest margin declined by 43 basis points to 4.36%, while net interest spread declined by 49 basis points to 4.06%. Provision for Loan Losses. The Company records provisions for loan losses, which are charged to earnings, in order to maintain the allowance for loan losses at a level to absorb probable loan losses inherent in the existing portfolio. The Company recorded $200,000 and $300,000 in loan loss provisions during the three months ended March 31, 2004 and 2003, respectively. The decrease in the provision reflects the strong coverage ratios provided by the allowance, as well as the Company's historical charge-off ratios. Non-Interest Income. Non-interest income for the three months ended March 31, 2004 was $2.8 million compared to $2.4 million for the three months ended March 31, 2003, an increase of $417,000 or 17.6%. Realized gains on securities available for sale were $518,000 for the current three-month period, compared to $427,000 for the same period last year. During the three-month period ending March 31, 2004, the Company also recorded gains on sales of loans totaling $84,000, compared to $403,000 for the same period last year. Excluding the effects of gains on sales of securities and loans, the increase was $645,000 or 42.0%. Banking fees and service charges increased by $692,000 or 62.1%, of which $403,000 was generated from the acquired ENB branches. The remaining increase of $289,000 was due primarily to volume-driven increases in overdraft, non-sufficient funds, and ATM and debit card fees. Other non-interest income decreased by $47,000, or 11.1%, due primarily to lower rates on the Company's bank owned life insurance investments. Non-Interest Expense. Excluding the charitable foundation contribution of $5 million, pre-tax, non-interest expense for the three months ended March 31, 2004 increased by $4.1 million, or 42.8%, to $13.7 million, compared to $9.6 million for the three months ended March 31, 2003. The acquisition of ENB in January 2004, played a major role in the increases in most categories, contributing to increases in compensation and employee benefits of $937,000. Excluding the acquisition-related salaries and benefits, the increase in compensation and benefits was $746,000, or 14.9%. The increase is primarily due to $193,000, or 5.5%, in annual salary increases and staff additions and a $273,000 increase in stock-based compensation plans, as the Company's stockholders realized an increase in the price of shares of the Company's common stock during the current period. Occupancy and office operations increased by $305,000, or 22.5%, for the three months ended March 31, 2004, almost all of which was attributable to the acquired Ellenville properties. Amortization of core deposit intangible increased by $588,000 as a result of the ENB deposits acquired. Other expenses increased by $617,000 or 40.8% due primarily to increases of $126,000, $134,000, $107,000 and $67,000, all respectively in director's stock-based compensation plans, office supplies, correspondent bank expense and postage. Further, merger integration expenses were $717,000. 27 Income Taxes. Income tax benefit was $ 200,000 for the three months ended March 31, 2004, compared to $1.5 million expense for the same period in 2003. The effective tax rates exclusive of the Charitable Foundation contribution were 36.9% and 37.0%, respectively. Comparison of Operating Results for the Six Months Ended March 31, 2004 and March 31, 2003 Net Income. For the six months ended March 31, 2004 net interest income after provision for loan losses was $27.1 million, up $4.6 million, or 20.5%, compared to $22.5 million for the same period of 2003. Non-interest income was $5.6 million for the six months ended March 31, 2004 compared to $4.4 million for the same period last year, an increase of $1.2 million, or 27.8%. Non-interest expenses increased $10.2 million, or 56.5% (including the $5 million contribution to the Charitable Foundation), to $28.2 million for the six months ended March 31, 2004 compared to $18 million for the same prior-year period. Net income was $3.1 million for the six months ended March 31, 2004 compared to $5.6 million for the same period last year. The relevant performance measures follow: Six Months Ended March 31, 2004 2003 ---- ---- Per common share: Basic earnings $0.09 $0.16 Diluted earnings 0.09 0.16 Dividends declared 0.07 0.06 Return on average (annualized): Assets 0.44% 1.06% Equity 2.92% 9.96% 28 The following table sets forth the consolidated average balance sheets for the Company for the periods indicated. Also set forth is information regarding weighted average yields on interest-earning assets and weighted average rates paid on interest-bearing liabilities (dollars in thousands).
Six Months Ended March 31, -------------------------- 2004 2003 ---- ---- Average Average Outstanding Average Outstanding Average Balance Interest Yield/Rate Balance Interest Yield/Rate ------- -------- ---------- ------- -------- ---------- Interest earning assets: Commercial and commercial mortgage loans (1) $ 310,471 $ 10,103 6.51% $ 214,590 $ 7,627 7.13% Consumer loans (1) 98,265 2,335 4.75 82,424 2,168 5.28 Residential mortgage loans (1) 397,523 11,913 5.99 380,507 12,680 6.68 ---------- -------- ---------- -------- Total loans 806,259 24,351 6.04 677,521 22,475 6.65 ---------- -------- ---------- -------- AFS investments and MBS 403,387 7,481 3.71 210,310 4,651 4.44 HTM investments and MBS 71,257 1,506 4.23 86,039 2,317 5.40 Other earning assets 11,615 65 1.12 2,356 20 1.70 ---------- -------- ---------- -------- Total securities and other earning assets 486,259 9,052 3.72 298,705 6,988 4.69 ---------- -------- ---------- -------- Total interest-earning assets 1,292,518 33,403 5.17 976,226 29,463 6.05 Non-interest-earning assets: 121,159 71,469 ---------- ---------- Total assets $1,413,677 $1,047,695 ========== ========== Interest bearing liabilities: Savings, clubs and escrow $ 318,634 739 0.46% $ 262,612 878 0.67% Money market accounts 139,112 377 0.54 116,627 541 0.93 NOW checking 68,852 81 0.24 83,250 117 0.28 Certificate accounts 274,764 2,356 1.71 244,343 2,774 2.28 ---------- -------- ---------- -------- Total interest-bearing deposits 801,362 3,553 0.89 706,832 4,310 1.22 Borrowings 149,826 2,361 3.15 104,055 2,026 3.90 ---------- -------- ---------- -------- Total interest-bearing liabilities 951,188 5,914 1.24 810,887 6,336 1.57 Non-interest-bearing liabilities: 248,772 124,819 ---------- ---------- Total liabilities 1,199,960 935,706 Equity 213,717 111,989 ---------- Total liabilities and equity $1,413,677 $1,047,695 ========== ========== Net interest income $ 27,489 $ 23,127 ======== ======== Net interest rate spread 3.93% 4.48% ==== ==== Net earning assets $ 341,330 $ 165,339 ========== ========== Net interest margin 4.25% 4.75% ==== ==== Ratio of average interest-earning assets to average interest-bearing liabilities 135.88% 120.39% ======== ========
- -------------------------------------------------------------------------------- (1) Includes non-accrual loans. 29 The table below details the changes in interest income and interest expense for the periods indicated due to both changes in average outstanding balances and changes in average interest rates (in thousands): Six Months Ended March 31, 2004 vs. 2003 Increase/(Decrease) Due to -------------------------- Volume (1) Rate (1) Total ---------- -------- ----- Interest-earning assets Consumer loans $ 2,630 $ (154) $ 2,476 Commercial and commercial mortgage loans 253 (86) 167 Residential mortgage loans 165 (932) (767) Available for sale securities 3,051 (221) 2,830 Held to maturity securities (359) (452) (811) Other earning assets 47 (2) 45 ------- ------- ------- Total interest income 5,787 (1,847) 3,940 ------- ------- ------- Interest-bearing liabilities Savings 56 (195) (139) Money market 20 (184) (164) NOW checking (20) (16) (36) Certificates of deposit 92 (510) (418) Borrowings 504 (169) 335 ------- ------- ------- Total interest expense 652 (1,074) (422) ------- ------- ------- Net interest income $ 5,135 $ (773) $ 4,362 ======= ======= ======= - -------------------------------------------------------------------------------- (1) Changes due to increases in both rate and volume have been allocated proportionately to rate and volume. 30 Net Interest Income. Net interest income after provision for loan losses increased by $4.6 million, or 20.5%, to $27.1 million for the six months ended March 31, 2004 from $22.5 million for the same period in 2003. The increase in interest income reflects an increase in average earning assets of $316.3 million to $1.3 billion, offset by a decline in yield of 88 basis points to 5.17%. The cost of interest bearing liabilities declined by $422,000 as the average rate paid on average interest bearing funds decreased 33 basis points to 1.24%, even though average balances increased by $140.3 million to $951.2 million. Net interest margin decreased from 4.75% to 4.25% and net interest spread declined from 4.48% to 3.93%. Provision for Loan Losses. The Company records provisions for loan losses, which are charged to earnings, in order to maintain the allowance for loan losses at a level to absorb probable loan losses inherent in the existing portfolio. The Company recorded $350,000 and $600,000 in loan loss provisions during the six months ended March 31, 2004 and 2003, respectively. The decrease in the provision reflects the strong coverage ratios provided by the allowance, as well as the Company's historical charge-off ratios. Non-Interest Income. Non-interest income for the six-month period ended March 31, 2004 was $5.6 million, an increase of $1.2 million, or 28%, compared to $4.4 million for the same six-month period last year. Realized gains on securities available for sale and gains on sales of loans were $1.4 million and $170,000, respectively, for the current period, generating a combined increase of $92,000 over the securities and loan sales gains of $1.5 million for the same period last year. Banking fees and service charges increased to $3.2 million for the current six-month period, an increase of $987,000, or 44.8%, over the same period last year. The increase is primarily attributable to an increase in service fees of $403,000 resulting from the acquired branches, coupled with volume-related increases in service fees on new and existing accounts at the Company's existing branches. Other non-interest income increased by $138,000, or 21.5%, to $779,000 for the six-month period ended March 31, 2004, from $641,000 for the same period last year. The increase is primarily due to $292,000 in income from the bank owned life insurance ("BOLI") for the current six-month period compared to $161,000 for the same period last year, as the BOLI program was established in December 2002. Non-Interest Expense. Excluding the charitable foundation contribution of $5 million, non-interest expense increased to $23.2 million for the six-month period ended March 31, 2004, an increase of $5.2 million, or 28.9%, compared to $18.0 million for the same six-month period last year. Increases in compensation and benefits directly attributable to the acquisition of ENB were $937,000 and in occupancy and office operations were $299,000. Compensation and benefits not related to the acquisition increased by $1.5 million, of which $393,000 was attributable to the increased cost of stock-based compensation plans. Additional increases in non-interest expense categories for the current year to date period are increased advertising costs of $124,000, or 13.6%, and a volume-related increase of $131,000, or 9.5%, in data and check processing costs. Amortization of intangible assets increased by $545,000 due to the addition of the ENB core deposit intangible. Other non-interest expenses increased by $688,000, or 22.5% primarily due to increases in office supplies ($196,000), directors' stock-based compensation plans ($147,000), postage ($82,000) and correspondent bank expense ($81,000). Merger integration costs were $717,000. Income Taxes. Income tax expense was $1.4 million for the six months ended March 31, 2004 compared to $3.3 million for the same period in 2003. Excluding the impact of the charitable foundation contribution, the effective tax rates were 35.7% and 37.3%, respectively. 31 Liquidity and Capital Resources The objective of the Company's liquidity management is to ensure the availability of sufficient cash flows to meet all financial commitments and to capitalize on opportunities for expansion. Liquidity management addresses the Company's ability to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund new loans and investments as opportunities arise. The Company's primary sources of funds are deposits, proceeds from principal and interest payments on loans and securities, and, to a lesser extent, wholesale borrowings, the proceeds from maturities of securities and short-term investments, and proceeds from sales of loans originated for sale and securities available for sale. Maturities and scheduled amortization of loans and securities, as well as proceeds from borrowings, are predictable sources of funds. Other funding sources, however, such as deposit inflows and mortgage prepayments are greatly influenced by market interest rates, economic conditions and competition. The Company's primary investing activities are the origination of both residential one- to four-family and commercial mortgage loans, and the purchase of investment securities and mortgage-backed securities. During the six-months ended March 31, 2004 and March 31, 2003, loan originations, excluding loans originated for sale, totaled $151.3 million and $188.9 million, respectively, and purchases of securities totaled $335.7 million and $106.2 million, respectively. For the six-month periods ended March 31, 2004 and 2003, these investing activities were funded primarily by principal repayments on loans, by proceeds from sales and maturities of securities, by deposit growth and stock subscriptions received in the Company's stock offering completed in January 2004. Loan origination commitments totaled $82.2 million at March 31, 2004. The Company anticipates that it will have sufficient funds available to meet current loan commitments. In December 2002 the Company invested $12 million in BOLI contracts. Such investments are illiquid and are therefore classified as other assets. As the Company's quarterly earnings, excluding the charitable foundation contribution, exceeded $3.0 million, it is expected that the funds will be replaced by retained earnings in approximately 1.25 years, thereby not having a significant impact on capital and liquidity. Earnings from BOLI are derived from the net increase in cash surrender value. Deposit flows are generally affected by the level of interest rates, the interest rates and products offered by local competitors, the appeal of non-deposit investments, and other factors. Excluding the acquisition of ENB, the net increase in total deposits for the six months ended March 31, 2004 was $12.0 million, compared to $41.0 million for the six months ended March 31, 2003. On January 14, 2004 the Company completed its stock offering in connection with the second-step conversion of Provident Bancorp, MHC. As a result of the conversion, the Company became the stock holding company of the Bank. In the stock offering, shares representing Provident Bancorp, MHC's ownership interest in Provident Federal were sold to investors. In addition, the Company simultaneously completed its acquisition of E.N.B. Holding Company, Inc., located in Ellenville, New York. Provident Delaware sold 19,573,000 shares of common stock at $10.00 per share to depositors of Provident Bank as of June 30, 2002 and September 30, 2003. The new holding company also issued 400,000 shares of common stock and contributed $1.0 million in cash to the Provident Bank Charitable 32 Foundation. In addition, each outstanding share of common stock of the Company as of January 14, 2004 has been converted into 4.4323 new shares of the Corporation's common stock. Shareholders of ENB as of the close of business on January 14, 2004 received total merger consideration of approximately $76.47 million, consisting of 3,969,676 shares of common stock of the Company and approximately $36.77 million in cash. The Company monitors its liquidity position on a daily basis. Although the Company sold $15.0 million in federal funds at period end, it generally remains fully invested and utilizes additional sources of funds through FHLB overnight advances, of which none were outstanding at March 31, 2004. The Company has the ability to borrow an additional $300.6 million under its credit facilities with the Federal Home Loan Bank of New York. At March 31, 2004, the Bank exceeded all of its regulatory capital requirements with a Tier 1 capital (leverage) level of $194.4 million, or 11.9% of adjusted assets (which is above the required level of $65.3 million, or 4.0%) and a total risk-based capital level of $207.3 million, or 20.2% of risk-weighted assets (which is above the required level of $82.0 million, or 8.0%). In order to be classified as well-capitalized, the regulatory requirements call for leverage and total risk-based capital ratios of 5.0% and 10.0%, respectively. In performing this calculation, the intangible assets recorded in the April 2002 NBF acquisition and the January 2004 ENB acquisition are deducted from capital and from total adjusted assets for purposes of regulatory capital measures. At March 31, 2004, the Bank exceeded all capital requirements for well-capitalized classification. These capital requirements, which are applicable to the Bank only, do not consider additional capital retained at the holding company level. The following table sets forth the Bank's regulatory capital position at March 31, 2004 and September 30, 2003, compared to OTS requirements.
OTS Requirements -------------------------------------------- Minimum Capital For Classification Bank Actual Adequacy as Well Capitalized ------------------ ------------------- ------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- (Dollars in thousands) March 31, 2004 Tangible capital $194,419 11.9% $ 24,486 1.5% $ -- --% Tier 1 (core) capital 194,419 11.9 65,297 4.0 81,621 5.0 Risk-based capital: Tier 1 194,419 19.0 61,530 6.0 Total 207,290 20.2 82,040 8.0 102,549 10.0 September 30, 2003 Tangible capital $ 93,497 8.1% $ 17,231 1.5% $ -- --% Tier 1 (core) capital 93,497 8.1 45,950 4.0 57,437 5.0 Risk-based capital: Tier 1 93,497 13.7 -- -- 40,835 6.0 Total 102,041 15.0 54,447 8.0 68,058 10.0
33 Asset/Liability Management The primary functions of asset/liability management are to assure adequate liquidity and maintain an appropriate balance between interest-sensitive earning assets and interest-bearing liabilities and capital resources. The Company's ALCO Committee of the Board monitors, and the Bank, through its Management ALCO Committee, controls the rate sensitivity of the balance sheet while seeking to maintain an appropriate level of net interest income contribution to the operations of the Company. The Company's net interest income is affected by fluctuations in market interest rates as a result of timing differences in the repricing of its assets and liabilities. These repricing differences are quantified in specific time intervals and are referred to as interest rate sensitivity gaps. The Company manages the interest rate risk of current and future earnings to a level that it considers consistent with its mix of business and seeks to limit such risk exposure to appropriate percentages of both earnings and the imputed value of stockholders' equity. The objective in managing interest rate risk is to support the achievement of business strategies, while controlling earnings variability and seeking to provide appropriate liquidity. Further, the historical level of transaction accounts (greater than 15% of total assets) serves to mitigate the effects of increases in interest rates and reduce the average cost of total liabilities. The following chart (dollars in thousands) provides a quantification of the Company's interest rate sensitivity gap as of March 31, 2004, based upon the known repricing dates of certain assets, at amortized cost, and liabilities and the assumed repricing dates of others. As shown in the following chart, at March 31, 2004, assuming no management action, the Company's principal interest rate risk is to a falling rate environment, and particularly within a one-year time frame. That is, net interest revenue would be expected to be adversely affected by a decrease in interest rates below the rates embedded in the current yield curve, principally due to the higher level of assets ($719.0 million) that would reprice relative to similarly categorized liabilities ($643.2 million) in that time frame. 34
3 months 4 months to Total within One to Over Five Maturity Repricing Date (1) or less One Year One Year Five Years Years TOTAL ---------- ----------- ------------ ---------- ---------- ---------- Securities $ 39,925 $ 87,685 $ 127,610 $ 293,310 $ 172,988 $ 593,908 Fixed Rate Loans (3) 118,684 200,276 318,960 216,219 71,847 607,026 Variable Rate Loans (2), (3) 206,275 66,181 272,456 46,271 19,817 338,544 ---------- ---------- ---------- ---------- ---------- ---------- Total Interest Earnings Assets (1) $ 364,884 $ 354,142 $ 719,026 $ 555,800 $ 264,652 $1,539,478 ========== ========== ========== ========== ========== ========== Total Deposits (4),(5) $ 208,625 $ 372,514 $ 581,139 $ 372,904 $ 254,331 $1,208,374 Borrowing (6) 53,181 1,937 55,118 38,383 41,225 134,726 Other 918 6,075 6,993 -- -- 6,993 ---------- ---------- ---------- ---------- ---------- ---------- Total Repricable Liabilities $ 262,725 $ 380,526 $ 643,250 $ 411,287 $ 295,556 $1,350,093 ========== ========== ========== ========== ========== ========== Period Gap 102,159 (26,384) 75,776 144,513 (30,904) 189,385 Percent of Total Assets 5.96% -1.54% 4.42% 8.43% -1.80% 11.05% Cumulative Gap 102,159 75,775 75,776 220,289 189,385 189,385 Percent of Total Assets (cumulative) 5.96% 4.42% 4.42% 12.85% 11.05%
- ---------- (1) Interest rate sensitivity gaps are defined as the fixed rate positions (assets less liabilities) for a given time period. The gaps measure the time weighted dollar equivalent volume of positions fixed for a particular period. The gap positions reflect a repricing date at which date funds are assumed to "mature" and reprice to a current market rate for the asset or liability. The table does not include loans on nonaccrual status as of March 31, 2004. (2) Prime-priced loans are considered as 1 to 3 month assets. (3) Variable rate balances are reported on their repricing formulas. Fixed rate balances are reported based on their scheduled contractual maturity dates, except for certain investment securities and loans secured by 1-4 family residential properties that are based on anticipated cash flow. (4) Noninterest bearing deposit liabilities were approximately $246 million at March 31, 2004. (5) Time Deposits totaling $350.0 million are classified by contractual maturity or repricing frequency as of March 31, 2004. (6) Borrowings of $134.7 million as of March 31, 2004 are classified by contractual maturity or repricing frequency. 35 Recent Accounting Standards In December 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46 (revised), Consolidation of Variable Interest Entities ("FIN 46R"), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and, accordingly, should consolidate the variable interest entity ("VIE"). FIN 46R replaces FASB Interpretation No. 46, which was issued in January 2003. As a public company that is not a small business issuer (as defined in applicable SEC regulations), the Company is required to apply FIN 46R to variable interests generally as of March 31, 2004 and to special-purpose entities as of December 31, 2003. For any VIE's that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at their carrying amounts and any difference between the net amount added to the balance sheet and any previously recognized interest would be recorded as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE. The adoption of FIN 46R did not and is not expected to have a significant effect on the Company's consolidated financial statements. In December 2003, the FASB also issued Statement of Financial Accounting Standards No. 132 (revised), Employers' Disclosures about Pensions and Other Postretirement Benefits ("SFAS No. 132R"). This standard prescribes employers' disclosures about pension plans and other postretirement benefit plans, but does not change the measurement or recognition of those plans. SFAS No. 132R retains and revises the disclosure requirements contained in the original standard. It also requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. As a public company, the Company will be required to provide substantially all of the revised disclosures beginning with its September 30, 2004 consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity, and requires that an issuer classify financial instruments that are considered a liability (or an asset in some circumstances) when that financial instrument embodies an obligation of the issuer. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 had no impact on the Company's consolidated statement of financial condition or results of operations upon implementation during the third quarter of 2003. In November 2003, the FASB also issued a staff position that indefinitely deferred the effective date of SFAS No. 150 for certain mandatorily redeemable non-controlling interests. The Company currently believes that the deferral of the effective date of SFAS No. 150 for certain mandatorily redeemable non-controlling interests will not have any impact on its consolidated statement of financial condition or results of operations when implemented. The issuance of SFAS No. 150 and FIN 46 has also resulted in the Federal Reserve Board announcing potential future reconsideration of trust preferred securities as elements of regulatory capital. The Company currently has no issuances of trust preferred securities. In March 2004, the FASB published an Exposure Draft, "Share-Based Payment, an Amendment of FASB Statements No. 123 and 95." The Exposure Draft proposes changes in accounting that would 36 replace existing requirements under SFAS 123 and APB Opinion NO 25, "Accounting for Stock Issued to Employees." Under the proposal, all forms of share-based payments to employees, including employee stock options, would be treated the same as other forms of compensation by recognizing the related cost in the income statement. The expense of the award would generally be measured at fair value at the grant date. Current accounting guidance requires that the expense relating to so-called fixed plan employee stock options only be disclosed in the footnotes to the financial statements. Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's most significant form of market risk is interest rate risk, as the majority of its assets and liabilities are sensitive to changes in interest rates. The Bank's interest rate profile has changed since September 30, 2003 as a result of the $192.4 million in new capital and the acquisition of ENB. As a result of these events, the Bank has become more asset sensitive, which indicates that more of the Bank's assets will now reprice quicker than its liabilities and that net interest income should increase if rates increase gradually. However, if rates increase rapidly as a result of an improving economy, the Bank may have to increase the rates paid on deposits and borrowed funds quicker than loans and investments reprice, resulting in a negative impact on interest spreads and net interest income. In addition, the impact of rising rates could be compounded if deposit customers move funds from savings accounts back to higher-rate certificate of deposit accounts. Conversely, should market interest rates continue to fall below today's level the Company's net interest margin could also be negatively affected, as competitive pressures could keep the Bank from reducing rates much lower on its deposits and prepayments and curtailments on assets may continue. Such movements may cause a decrease in the interest rate spread and net interest margin. Other types of market risk, such as foreign exchange rate risk and commodity price risk, do not arise in the normal course of the Company's business activities. As discussed in Note 2, as of January 14, 2004, the Company completed its stock offering and acquisition of ENB. The Company received $192.4 million in new funds for stock subscriptions; pending utilization of funds for its general business needs, the proceeds were invested in securities (primarily mortgage backed securities), securities of US government sponsored agencies and US Treasuries with an average life of approximately three years. Quantitative and qualitative disclosure about market risk is presented at September 30, 2003 in Item 7A in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 29, 2003. The following is an update of the discussion provided therein. General. The Company's largest component of market risk continues to be interest rate risk. The Company is not subject to foreign currency exchange or commodity price risk. At March 31, 2004, neither the Company nor the Bank owned any trading assets, nor did they utilize hedging transactions such as interest rate swaps and caps. GAP Analysis: The one-year and five-year cumulative interest sensitivity gap as a percentage of total assets have changed from (17%) and 10% at September 30, 2003, respectively, to 4% and 13% at March 31, 2004, respectively. Investments, loans and fixed rate time deposits utilized contractual repricing dates in this analysis. Non-maturity deposits (demand, money market and savings) have been decayed utilizing national norms. Interest Rate Risk Compliance: The Bank continues to monitor the impact of interest rate volatility upon net interest income and net portfolio value in the same manner as at September 30, 2003. There have been no changes in the board approved limits of acceptable variance in net interest income 37 and net portfolio value change at March 31, 2004 compared to September 30, 2003, and the impact of possible changes within the Company's models continue to fall within all board approved limits for potential interest rate volatility. Item 4. Controls and Procedures The Company's management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) (the "Exchange Act") as of the end of the period covered by this report. Based upon that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time frames specified in the SEC's rules and forms. There were no significant changes made in the Company's internal controls over financial reporting or in other factors that could significantly affect the Company's internal control over financial reporting during the period covered by this report. 38 PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business, which, in the aggregate, involved amounts which are believed to be immaterial to the consolidated financial condition and operations of the Company. Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None 39 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit Number Description -------------- ----------- 31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K: The Company filed the following reports on Form 8-K during the three months ended March 31, 2004: 1) On March 19, 2004, the Company filed a Form 8-K/A announcing that it completed its acquisition of ENB and submitting related proforma financial information. 2) On March 16, 2004, the Company filed a Form 8-K announcing that it issued a press release announcing it has entered into a definitive merger agreement with Warwick Community Bancorp, Inc. ("WCBI") pursuant to which the Company will acquire WCBI and its banking subsidiaries. In addition the Company filed an investor presentation made in connection with acquisition. 3) On March 18, 2004 the Company filed a report on Form 8-K filing a copy of the merger agreement dated March 15, 2004 between the Company and Warwick Community Bancorp, Inc. 4) On January 26, 2004 the Company furnished a report on Form 8-K announcing that it issued a press release regarding its earnings for the fiscal quarter ending December 31, 2003. 5) On January 22, 2004 the Company filed a report on form 8-K announcing the issuance of 19,573,000 shares in connection with its second-step conversion, 400,000 shares in connection with the formation of a charitable foundation, 3,969,676 shares in connection with the acquisition of ENB Holding Company, Inc. and exchanged common shares at an exchange ratio of 4.4323 shares for each existing share of Provident Bancorp, Inc., a federal corporation. 40 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Provident Bancorp, Inc. ----------------------- (Registrant) By: \s\ George Strayton ------------------ George Strayton President and Chief Executive Officer (Duly Authorized Representative) Date: May 13, 2004 By: \s\ Paul A. Maisch ------------------ Paul A. Maisch Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Representative) Date: May 13, 2004 41 EX-31.1 2 ex31-1.txt Exhibit 31.1 I, George Strayton, President and Chief Executive Officer, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Provident Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 42 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 13, 2004 \s\ George Strayton ------------------------------------- George Strayton President and Chief Executive Officer 43 EX-31.2 3 ex31-2.txt Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Paul A. Maisch, Senior Vice President and Chief Financial Officer, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Provident Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 44 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 13, 2004 \s\ Paul A. Maisch ------------------------- Paul A. Maisch Senior Vice President and Chief Financial Officer 45 EX-32.1 4 ex32-1.txt Exhibit 32.1 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 George Strayton, Chief Executive Officer and Paul A. Maisch, Chief Financial Officer of Provident Bancorp, Inc. (the "Company") each certify in his capacity as an officer of the Company that he has reviewed the quarterly report on Form 10-Q for the quarter ended March 31, 2004 and that to the best of his knowledge: (1) the report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement required by Section 906 has been provided to Provident Bancorp, Inc. and will be retained by Provident Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. \s\ George Strayton ------------------------- Date: May 13, 2004 George Strayton Chief Executive Officer \s\ Paul A. Maisch ------------------------- Date: May 13, 2004 Paul A. Maisch Chief Financial Officer 46 -----END PRIVACY-ENHANCED MESSAGE-----